The Effect of Economic Events on Forex Trading

There are only two responses that traders give when asked about fundamental economic events and how they affect their trading. The first belongs to the purely technical trader who says that the market has already priced in the fundamental factors and you should only look at the long term trend, your existing chart patterns and search for the right point to enter the market. However, the fundamental traders acknowledges the need for technical analysis but will not make an entry into the market without understanding why the market is going move in the direction the indicators are pointing.

Technical analysis, much like most indicators, is a lagging predictor. The few indicators that do offer a small window into the future are still based on historical patterns and events that have happened or are currently happening. Technical analysis is a barometer of the market and can only offer a taste of what may occur. Many traders use technical analysis to gauge the way the wind is blowing and then make their trades. Strict fundamental traders are much the same as they stick their head in the sand and make sure moves based on current economic theory; regardless of the number of times those “sure” moves have cost them money.

The combination of technical and fundamental analysis provides a much clearer picture of what is actually occurring in the marketplace. Technical traders who do not look at the economic forecasts may find themselves stuck in long term losing trades based on technical indicators that do not pick up the changing tide. Just as strictly fundamental traders miss opportunities to make money on shorter time frames based on the patterns of history.

Fundamental economic news can relate to almost anything that happens in the country of the underlying currency. Elections, political infighting, labor strikes, war and employment statistics all play a factor in how strong or weak a particular currency will be in the coming hours, days and weeks. For instance, as the price of gold rises the AUD becomes stronger since a large part of their economy is based on gold mining and export. However, as the balance begins to move the AUD begins to level off because prices and inflation begin to rise offsetting the strength that was earlier posed. Fundamental traders see these patterns happen while technical traders hang on to their trades and wait for the change in the weather before moving the other direction often getting hung out to dry on a market top.

In conclusion, no trader is able to work in a vacuum and all long-term successful traders find ways to to filter economic data and news releases through their systems, as well as provide for time to study technical information. Economic news releases often make the currency markets very volatile for hours after their release while slowly filtering news such as elections may take weeks to show their effect on the market. Market indicators will always lag behind when they are based on historical data, however finding a way to view them through the eyes of economic news releases can provide you with a way to profit from your Forex trading that you may have never seen before.